IC306-Foreign Exchange and Money Markets

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring term module
Non-modular pre-requisites:
Modules excluded:
Module version for: 2016/7

Module Convenor: Mr Richard Comotto

Email: r.comotto@icmacentre.ac.uk

Summary module description:
This module is delivered at University of Reading and University of Reading Malaysia.

The aim of this module is to equip students with a firm understanding of the overall functions, structure and operation of the money market including FX. The course covers cash, forward and derivative instruments, and provides the basic technical knowledge to trade, hedge with, arbitrage and manage these instruments. The course introduces and illustrates a number of key practical trading parameters such as balance sheet, risk capital and other regulatory requirements, liquidity and funding risks and the legal basis of the various instruments, as well as concepts such as OTC markets, netting, fair v market value and basis risk. The course demonstrates that there is a single body of simple arithmetic that underlies and ties together all money market instruments, including derivatives, and that the different instruments are substitutes in liquidity and risk management.

Assessable learning outcomes:
•To define the economic function of the FX and money markets, and identify its key characteristics and structural features.
•To analyse the rate of return into its component elements and use this analysis to explain the spreads between the rates on different cash instruments. To interpret forward rates and the link to cash rates.
•To describe, compare and contrast cash and derivative FX and money market instruments in terms of their structure, operation, application, type of user and risk/return characteristics.
•To apply a common body of financial arithmetic to the pricing and valuation of cash, forward and derivative FX and money market instruments.
•To demonstrate how instruments can be use to take risk outright or in spread/basis trades against other instruments using generic trading strategies, to hedge or to synthesise each other, and to identify arbitrage opportunities.
•To demonstrate the economic relationship between cash, forward and derivative money market instruments.

Additional outcomes:
• Familiarity with practical issues such as balance sheet constraints, risk capital and liquidity requirements, liquidity and funding issues, and legal risk.
• Understanding of concepts such as derivatives, OTC markets, netting, fair value, market value, basis risk and no-arbitrage pricing.
• To recognise the influence of central bank monetary policy operations on money market rates and the impact of market regulation on trading.

Outline content:
1 Money market price conventions. Role of bid/offer spreads.
2 Common concepts and consistent application of money market arithmetic.
3 The functions and characteristic features of the money market.
4 Comparison of cash money market instruments: deposits, Treasury bills, bank bills, CP, CD and repo. Key indices: LIBOR/LIBID/LIMEAN, other IBORs, EONIA and other OI. The role and construction of indices. Bid/offer spreads and spreads between rates of return on different cash instruments.
5 Analysis of rates of return into risk-free rate, risk premia and basis, and sub-components, and comparison across instruments.
6 Generic interest rate trading strategies.
7 The impact of capital requirements and liquidity regulation on money markets.
8 Interest rate risk in the money market: cash and forward rates. The forward curve and yield curve.
9 Forward-forward loans/deposits and positions. Origins and drawbacks.
10 Money market derivatives: FRA. The mechanics and terminology of FRAs. Use in hedging: early payment and discounting of the settlement amount.
11 Money market derivatives: money market interest rate swaps. Mechanics and terminology. Use in risk-taking, hedging and arbitrage. Pricing and revaluing swaps. OIS.
12 Exchange rate conventions. The FX market. Forward FX: pricing, interest rate parity, covered interest arbitrage and synthetic foreign currency borrowing/lending. FX and currency swaps. TN swaps. Historic rate roll-overs. Forward-forward FX, NDFs and synthetic FRAs.

Brief description of teaching and learning methods:
Lectures, supported by tutorials. Students will receive pre-course reading on basic money market arithmetic, which they are expected to master before attending classes. Self-marked arithmetic tests are provided on Blackboard. Further arithmetic and instrument self-tests will be made available during the course.

Contact hours:
  Autumn Spring Summer
Lectures 20
Seminars 10
Guided independent study 170
Total hours by term 200.00
Total hours for module 200.00

Summative Assessment Methods:
Method Percentage
Written exam 70
Class test administered by School 30

Other information on summative assessment:
Two class tests administered by the school (15% each)

Formative assessment methods:

Penalties for late submission:
The Module Convenor will apply the following penalties for work submitted late, in accordance with the University policy.

  • where the piece of work is submitted up to one calendar week after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for the piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of five working days;
  • where the piece of work is submitted more than five working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.

  • The University policy statement on penalties for late submission can be found at: http://www.reading.ac.uk/web/FILES/qualitysupport/penaltiesforlatesubmission.pdf
    You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

    Length of examination:
    2 hour closed book examination (answer 2 questions: Section A - 1 compulsory; Section B - 1 from 2)

    Requirements for a pass:
    40% weighted average mark

    Reassessment arrangements:
    By written examination only, as part of the overall examination arrangements for the BSc programme

    Additional Costs (specified where applicable):
    1) Required text books:
    2) Specialist equipment or materials:
    3) Specialist clothing, footwear or headgear:
    4) Printing and binding:
    5) Computers and devices with a particular specification:
    6) Travel, accommodation and subsistence:

    Last updated: 21 December 2016

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